Value and Momentum Everywhere

Value and Momentum Everywhere Asness, Clifford S.; Moskowitz, Tobias; Heje Pedersen, Lasse Document Version Accepted author manuscript Published in: Journal of Finance DOI: 10.1111/jofi.12021 Publication date: 2013 License Other Citation for published version (APA): Asness, C. S., Moskowitz, T., & Heje Pedersen, L. (2013). Value and Momentum Everywhere. Journal of Finance, 68(3), 929-985. https://doi.org/10.1111/jofi.12021 Link to publication in CBS Research Portal General rights Copyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights. Take down policy If you believe that this document breaches copyright please contact us ([email protected]) providing details, and we will remove access to the work immediately and investigate your claim. Download date: 25. Sep. 2021 Value and Momentum Everywhere Clifford S. Asness, Tobias J. Moskowitz, and Lasse Heje Pedersen Journal article (Post print version) This is the peer reviewed version of the following article Asness, CS, Moskowitz, T & Heje Pedersen, L 2013, 'Value and Momentum Everywhere' Journal of Finance, vol 68, nr. 3, s. 929- 985., which has been published in final form at 10.1111/jofi.12021. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving. Uploaded to Research@CBS: March 2016 Value and Momentum Everywhere Clifford S. Asness, Tobias J. Moskowitz, and Lasse Heje Pedersen∗ Current Version: June 2012 Abstract We study the returns to value and momentum strategies jointly across eight diverse markets and asset classes. Finding consistent value and momentum premia in every asset class, we further find strong common factor structure among their returns. Value and momentum are more positively correlated across asset classes than passive exposures to the asset classes themselves. However, value and momentum are negatively correlated both within and across asset classes. Our results indicate the presence of common global risks that we characterize with a three factor model. Global funding liquidity risk is a partial source of these patterns, which are identifiable only when examining value and momentum simultaneously across markets. Our findings present a challenge to existing behavioral, institutional, and rational asset pricing theories that largely focus on U.S. equities. ∗Asness is at AQR Capital Management. Moskowitz is at the University of Chicago Booth School of Business and NBER and is a consultant to AQR Capital. Pedersen is at the New York University Stern School of Business, Copenhagen Business School, AQR, CEPR, FRIC, and NBER. We thank Aaron Brown, John Cochrane, Kent Daniel, Gene Fama, Kenneth French, Cam Harvey (the editor), Ronen Israel, Robert Krail, John Liew, Harry Mamaysky, Michael Mendelson, Stefan Nagel, Lars Nielsen, Otto Van Hemert, Jeff Wurgler, and an anonymous referee for helpful comments, as well as seminar participants at the University of Chicago, Princeton University, Duke University, the Danish Society of Financial Analysts with Henrik Amilon and Asbjørn Trolle as discussants, and the NBER Summer Institute Asset Pricing Meetings with Kent Daniel as a discussant. We also thank Radhika Gupta, Kelvin Hu, Sarah Jiang, Adam Klein, Ari Levine, Len Lorilla, Wes McKinney, and Karthik Sridharan for research assistance. AQR Capital invests in, among other things, value and momentum strategies. The views expressed here are those of the authors and not necessarily those of any affiliated institution. Two of the most studied capital market phenomena are the relation between an asset’s return and the ratio of its “long-run” (or book) value relative to its current market value, termed the “value” effect, and the relation between an asset’s return and its recent relative performance history, termed the “momentum” effect. The returns to value and momentum strategies have become central to the market efficiency debate and the focal points of asset pricing studies, generating numerous competing theories for their existence. We offer new insights into these two market anomalies by examining their returns jointly across eight diverse markets and asset classes. Chiefly, we find significant return premia to value and momentum in every asset class and strong co-movement of their returns across asset classes, both of which challenge existing theories for their existence. We provide a simple three factor model that captures the global returns across asset classes, the Fama- French U.S. stock portfolios, and a set of hedge fund indices. The literature on market anomalies predominantly focuses on U.S. individual equities, and often examines value or momentum separately. In the rare case where value and momentum are studied outside of U.S. equities, they are also typically studied in isolation—separate from each other and separate from other markets. We uncover unique evidence and features of value and momentum by examining them jointly across eight different markets and asset classes (individual stocks in the U.S., U.K., Europe, and Japan, country equity index futures, government bonds, currencies, and commodity futures).1 Although some of these markets have been analyzed in isolation, our joint approach provides unique evidence on several key and novel questions about these pervasive market phenomena. Specifically, how much variation exists in value and momentum premia across markets and asset classes? How correlated are value and momentum returns across these diverse markets and asset classes with different geographies, structures, investor types, and securities? What are the economic drivers of value and momentum premia and their correlation structure? What is a natural benchmark model for portfolios of global securities across different asset classes? 1 Early evidence on U.S. equities finds value stocks on average outperform growth stocks (Stattman (1980), Rosenberg, Reid, and Lanstein (1985), and Fama and French (1992)) and stocks with high positive momentum (high 6-12 month past returns) outperform stocks with low momentum, (Jegadeesh and Titman (1993) and Asness (1994)). Similar effects are found in other equity markets (Fama and French (1998), Rouwenhorst (1998), Liew and Vassalou (2000), Griffin, Ji, and Martin (2003), Chui, Wei, and Titman (2010)), and in country equity indices (Asness, Liew, and Stevens (1997) and Bhojraj and Swaminathan (2006)). Momentum is also found in currencies (Shleifer and Summers (1990), Kho (1996), and LeBaron (1999)) and commodities (Erb and Harvey (2006) and Gorton, Hayashi, and Rouwenhorst (2008)). 1 We find consistent and ubiquitous evidence of value and momentum return premia across all the markets we study, including value and momentum in government bonds and value effects in currencies and commodities, which are all novel to the literature. Our broader set of portfolios generates much larger cross-sectional dispersion in average returns than those from U.S. stocks only, providing a richer set of asset returns that any asset pricing model should seek to explain. Most strikingly, we discover significant co-movement in value and momentum strategies across diverse asset classes. Value strategies are positively correlated with other value strategies across otherwise unrelated markets, and momentum strategies are positively correlated with other momentum strategies globally. However, value and momentum are negatively correlated with each other within and across asset classes. The striking co-movement pattern across asset classes is one of our central findings and suggests the presence of common global factors related to value and momentum. This common risk structure implies a host of results we investigate further. For example, using a simple three factor model, consisting of a global market index, a zero cost value strategy applied across all asset classes, and a zero cost momentum strategy across all assets, we capture the co-movement and the cross section of average returns both globally across asset classes and locally within an asset class. We further show that the global three factor model captures well the returns to the Fama and French U.S. stock portfolios as well as a set of hedge fund indices. Our use of a simple three factor model in pricing a variety of assets globally is motivated by finance research and practice becoming increasingly global and the desire to have a single model that describes returns across asset classes rather than specialized models for each market. We show that separate factors for value and momentum best explain the data, rather than a single factor, since both strategies produce positive returns on average yet are negatively correlated.2 We then investigate the source of this common global factor structure. We find only modest links to macroeconomic variables, such as business cycle, consumption, and default risk. However, we find significant evidence that liquidity risk is negatively related to value and positively related to momentum globally across asset classes. Pastor and Stambaugh (2003) and Sadka (2006) find that measures of liquidity risk are positively related to momentum in U.S. individual stocks. We show that this link is also present in other markets and asset classes and show that value returns are significantly negatively related to liquidity risk globally, implying that part of the negative correlation

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